As any conservative can tell you, Obamacare is a job-killing “train wreck.” Not only is it a job killer, there is no way that it could possibly work. Except, of course, it does.

When I last visited this issue, the percentage of adults without health insurance had fallen from its peak of 18.0% in the third quarter of 2013 to 13.4% in the second quarter of 2014. Now, as Gallup (via Matt Yglesias) shows us, it continues to fall, dropping to 11.9% in the first quarter of 2015, based on over 43,000 interviews throughout the quarter. This is a drop of exactly one percentage point from the fourth quarter of 2014, or about 2.4 million adults.

The gains that we have seen now through two enrollment cycles (Q4 2013 through Q1 2015) affect every major demographic group, as the following table from Gallup shows.

Especially notable are the gains for minorities (8.3 percentage points for Hispanics and 7.3 for African-Americans), those with income below $36,000 per year (8.7 points) and adults from 26-34 (7.4 points). But notice that even Americans making over $90,000 annually have seen their uninsured rate fall by 2.3 points, meaning that 40% of this group is no longer uninsured. This is actually the biggest percentage gain among any of the demographics Gallup surveyed.

As Gallup and Yglesias both point out, part of the reason for the improvement is the declining unemployment rate. But Yglesias is right on the money that this undermines the “job-killer” meme. In fact, as he shows, 2014 was “the best year of job creation since 1999.”

This is one argument conservatives aren’t going to win. In fact, it looks like they’ve already lost the vote of one Tea Partier who was able to retire early because of Obamacare.

Maggie Mahar Health Care Blog discusses some of the rhetoric employed in media on how to pay for health insurance.

In other words, when costs are distributed over a large group, older adults save more than younger adults lose.

Still, many believe that older Boomers can and should pick up the higher tab for their own care. After all, throughout their financial lives, they have been luckier than most: they enjoyed first crack at the employment market when jobs were plentiful, and first dibs on housing when homes were affordable.

…

Yet in recent years, the economy has not been kind to the rock ‘n roll generation. One in six is now unemployed, and from 2000 to 2011, the average (mean) after-tax income of Americans age 45 to 54 (who are now in their 50s and early 60s) plunged by 13.3 percent.

By that measure, the recession has hit them harder than other age groups except Americans aged 15 to 24. Over those years, this cohort should have been enjoying their peak earning years. But as the chart below reveals, they didn’t.

Yet there’s a trade off: if age rating were abolished, younger adults would be charged more, and some would decide they can’t afford insurance. Bottom line: “the number of uninsured older Americans would be roughly offset by increases in the number of uninsured adults in the two younger age groups (18-34 and 34-44).”

This worries policymakers for two reasons. First, we need young, healthy Americans in the pool to keep insurance costs down. Secondly, if young families decide to forego insurance, many won’t buy separate policies for the children.How do we choose between children and their grandparents?

If we don’t want to ration care, the only rational solution is to bring down the cost by trimming waste in our health care system. This will be difficult. Most of the fat isn’t hanging out on the edges of the steak – it’s marbled throughout in the form of unnecessary treatments and over-priced products. It needs to be removed carefully, with a scalpel. But it can be done.

Jon Hammond from econographia reseached the topic of contraceptive pills on the cost aspects involved with health insurance at my request. Instead of losing real data in the comments sections on previous posts, I am posting his findings here:

Here are some of the empirical findings dealing with the insurance costs and cost-savings of coverage for contraceptive services. The direct costs of providing contraception as part of a health insurance plan are very low and do not add more than approximately 0.5% to the premium costs per adult enrollee (see Daroch, J. E.). In 1998, Buck Consultants estimated that the direct cost of providing contraceptive benefits averaged $21 per enrollee per year (see Daroch, J. E.). The most recent actuarial analysis, completed by the Actuarial Research Corporation in July 2011, using data from 2010, estimated a cost of about $26 per year per enrolled female (see Callahan, C.)

However, with respect to the effect on insurance premiums when medical costs associated with unintended pregnancies are taken into account … including costs of prenatal care, pregnancy complications, and deliveries … the net effect on premiums is close to zero (see Washington Business Group on Health, Sept 2000). And when time away from work and lost productivity are considered (factors salient to employers) . . the total costs to employers are reduced.

PriceWaterhouseCoopers issued a report in 2007 which found that providing contraceptive services yields a net cost-savings (see Campbell, K.P.).

The cost-savings impact of contraceptive services has also been demonstrated via the Medicaid Section 1115 Family Planning Demonstrations conducted in six states in the 1990s. Please refer to Tthe February 2012 U.S. DHHS brief on this subject .. it contains both the content and full citations noted in abbreviated form above .. see here:

Now, I hear something all the time in my work in the health policy realm, and that is that the “free market” could lower prices.

I even recently had someone approach me after I mentioned that the PPACA had resulted in an extra million people aged 18-25 having health coverage this year. His statement? “That’s exactly the wrong direction, we need to have less people, far less people with health insurance.” I asked him his reasoning…of course, already knowing what his response would be. He reasoned that it would force people to compare prices, shop around, and would dramatically lower prices through the mythical, magical “free market”….

Of course, this ignores some rather real problems with this line of thinking. For starters, healthcare does not behave like normal commodities for a variety of reasons.

To start with, healthcare does not lend itself to price comparisons, and comparison shopping. The high costs are often related to trauma and emergency care/hospitalizations. It is simply not practical to ask which hospital in the area offers the best rates on cardiac catheterizations while you are being rushed to the hospital in the midst of an MI.

This impracticality also lends itself to probably the biggest problem. That is irrational behavior. Any of us who have taken even undergraduate economics remember the discussions of rational actors, and how prices were sensitive to rational behavior. Much of health care involves emotionally charged, heated, and oftentimes difficult decisions. Most patients and families can hardly be expected to act in a rational fashion about receiving the news of a terrible diagnosis such as cancer. Real world experience reveals this to be true. I wish I could count how many times I have presented various treatment options to patients, only to hear “Do whatever it takes”.

Hayek once wrote that spontaneous order was a result of market economies, and that it was “a more efficient allocation of societal resources than any design could achieve.” This of course, assumes rational behavior, and assumes that a market can be symmetric.

Because of this behavior, and because people view healthcare not as optional, but as a necessity, price elasticity scores generally trend around 0 or -1. This indicates an inelastic market.

Of course, the next time I have a 21 year old kid who comes in after a farm accident without insurance, and is badly injured, I’ll make sure to tell him that perhaps he should have shopped around.

Following a merger, a few months ago I took a severance package from my most recent employer. Put another way, I became unemployed. I started looking for another job but without much luck. In the last few weeks, I’ve also started doing some consulting work with two clients. Its been sporadic but lucrative, and I’m trying to figure out how to ramp that up quickly. Having been a consultant before for eight years, I know the tough thing is always maintaining a strong enough stable of clients. (FYI, the work I’ve been doing has been economic analysis, business analytics, and litigation support. If you or anyone needs that sort of a skillset, drop me a line at “mike” period “kimel” at “gmail.com.”) Fortunately, in addition to the consulting, we have some other income coming in and a fair amount saved up, so I don’t need to get 100 mph immediately.

One of the drawbacks of being unemployed or an independent consultant involves health insurance. When I left my employer, I became eligible for COBRA. Here’s my ongoing COBRA story. I’m going to change all names to protect the guilty and innocent alike. Call my former employer A, the COBRA administrator they use B, and my insurance company C.

A few weeks after I took the severance, A informed B that I was no longer with the company and thus eligible for COBRA. I had been checking B’s website religiously because I’m kind of paranoid about lacking health insurance. So one day, I logged on and found that I was eligible. But there was a small problem – somewhere along the line, I had lost my dependents. So I called B, B called A, some other stuff happened in the background, a day or two went by, and when I logged in, lo and behold, my wife was now listed as a dependent. But there was a small problem – I also happen to have a (at the time) thirteen month old son. So I called B, B called A, some other stuff happened in the background, a day or two went by, and when I logged in, lo and behold, my son was now listed as a dependent. But there was a small problem – neither of my dependents was listed as having been on my insurance policies when I was employed, thus making them ineligible for COBRA coverage. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, my wife was listed as having been on my health insurance. But there was a small problem – my son was not listed as having had health insurance, making him ineligible for COBRA. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, both my dependents were listed as having been on my health insurance policy when I was employed. But there was a small problem – it seems that the records provided indicated that I had two spouses and no son. One of my two spouses, interestingly enough, had the same name, birthday and gender as my now non-existent son. The records, in other words, indicated that I personally was violating a nontrivial number of laws. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, well, I couldn’t find the mistake in the records. So I signed up for COBRA, and I put us on direct payment from my bank account.

All’s well that ends well, no matter how much time is wasted. But I did mention that my insurance company, C, was going to be a part of the story, right? Today a letter comes in the mail. My wife had gone to a dermatologist. The dermatologist submitted the bill to C. C informed the dermatologist that we no longer had coverage.

So I called B. It was a lovely conversation. I was informed that, yes, they have been withdrawing money from my account, and yes, I am paid in full, but nevertheless, C’s records do show us having no coverage. I was told B is calling C. I was told that in 24 to 48 hours I need to call C to see if they listed us as having the insurance coverage for which I have been paying. At some later point my wife or I will also have to call the dermatologist. Call me cynical, but I expect this is going to take a lot of time and interfere with my ability to generate income.

As an aside, in the past few weeks we’ve started looking at new insurance options. Interestingly enough, it seems that if everyone in the family is generally healthy, COBRA is generally not the best option.

My wife had knee surgery recently.* One of the great things about our then-current health insurer is that they provide complete data—list price, what they negotiated, what they paid, what you owe. Since we’re in the “doughnut hole,” I’m tracking more frequently than I usually would.

And the bills—possibly because we were moving to a new provider—were processed quickly. So what you see below is, in percent form, the amount of the list price (in relation to the whole) and the net benefit to the provider (ibid.).

As you can see, the surgeon’s list price isn’t even close to the level he received, while the hospital and, especially, the anesthesiologist, did relatively better.

There are multiple possible reasons for this, and I don’t pretend this is representative of what everyone—or even everyone with my now-sadly-former Insurance Provider—would receive. The key finding is that all of these contracts and negotiations were carried on by a single entity (my insurance carrier) with each provider. Promises were made—volumes, volume discounts, speed of processing, and whatever else was agreed—and contracts agreed between parties.

All before I get involved.

Which means that the final figures are set in stone. I don’t get to negotiate them. Maybe I get to negotiate a payment schedule, but the levels themselves are set. So even if I believe that the pie should be distributed differently—that the hospital (and maybe the anesthesiologist my wife didn’t want in the first place) should get a little less while the surgeon gets a bit more, for instance—I don’t get a say in that.

Nor do I get the information before choosing an insurer. (If I even get to choose, which I do not in the case of employer-provided health insurance.)

Short version: my choices have no direct effect. There is a “market” for health care, but patient usage and expenditures has no direct effect on it.

*This occurred just as the company was being acquired and therefore our health plan was being transferred from one provider to another, but that’s another story for another time.

One of the greatest myths that I hear on a somewhat regular basis, centers around the belief that the US must have one of the greatest health systems in the world, because everyone comes here for their care. Well, let’s examine that shall we?

As with many things, reality is a little different from the mythology.

According to the Deloitte Center for Health Solutions and Health-tourism.com, there will be roughly 561,000 inbound medical tourists to the United States by 2017….Conversely, 750,000 Americans traveled to foreign countries in 2007, and this grew to between 1.1 and 1.3 million outbound tourists in 2008. Spending on healthcare in foreign countries was estimated to be 20 billion dollars in 2008.

Thailand, with one hospital in Bangkok taking care of 64,000 US patients in 2006.SingaporeLatin AmericaMexicoMalaysiaIndia

Of these, India has the greatest potential for growth.

A legitimate question revolves around what reasons these patients are traveling for. Predictably, a lack of health insurance had a high correlation with travel for services. Surprisingly though, only 9% of patients who were surveyed listed price as the primary factor in their decision.

An entire industry is springing up to support this, and companies are now offering packages, and entering into arrangements with foreign hospitals.

What may or may not come as a surprise to many, is that, as the Deloitte report lists, there are many American Health Insurance companies that are entering into pilot studies sending American patients to foreign hospitals for treatment.

Some examples include:

Anthem BC/BS in Wisconsin (700 group members initially, being sent to India for treatment)

United Group in Florida (Promoting tourism to India and Thailand to 200,000 members)

BC/BS of South Carolina (Promoting tourism to Thailand)

So while there are foreign citizens who come to the US for treatment every year, it pales in comparison to the number of American citizens traveling elsewhere.

(Rdan here…One of the throw away lines about the where US Healthcare stood in the scheme of things is that Canadians come over the boarder for treatment, which is characterized as a comment on the Canadian healthcare system. No numbers are ever provided even when requested…maybe it is more complex than many are willing to deal with)

Well, it seems as if Congressional Republicans are going to propose a complete refashioning of the Medicare program. Specifically, they are going to recommend scrapping Medicare as a provider of health insurance to seniors, and instead replace it with a system that will provide subsidies to individuals who will then buy health insurance from private insurance companies. In other words, they want to get the federal government completely out of the health insurance business for senior citizens.

House Republicans plan to propose Tuesday historic changes to Medicare, Medicaid and other popular programs that pour federal money into Americans’ lives, arguing that a sacrifice now will keep those programs solvent for the future.

…On Medicare, Ryan will propose altering the plan so that the federal government no longer acts as a health insurer for seniors. Instead, he would create what’s called a “premium support plan.” Seniors would pick from a list of private insurance plans, and Medicare would subsidize their coverage.

The idea, again, is to use market competition to create a system with lower costs. Ryan’s plan would not apply to Americans age 55 and older, for whom Medicare would remain under the current system.

The notion that Medicare costs have been rising because it is a government-run health insurance program, or because it is not a “competitive” health insurance program, is odd, to say the least…

Theoretically, economists can list a number of very specific ways in which the markets for health care and health insurance are characterized by market failures. And for those of you who have forgotten your Econ 101 lessons, please recall that economic theory clearly predicts that when there are market failures there is no reason to necessarily expect that competition (i.e. the free market solution) will provide a good outcome.

Providing yet another example when economic theory actually matches what we see in the real world quite well, we find that there is absolutely no evidence that competition among private health insurance companies leads to lower costs. The Kaiser Family Foundation conducts a survey of employer-sponsored health insurance programs every year to estimate private health insurance premiums. Health insurance premiums for workers in large companies — those employing 200 people or more, which encompasses about 65% of all workers covered by private, competitive, employer-sponsored health insurance plans — rose by 135% over the ten year period 1999 to 2009.

Meanwhile, Medicare spending per person rose by about 103% over the same period. (Note that to get this figure I simply divided total Medicare costs from the CBO (pdf) by the number of Medicare enrollees as provided by Census (pdf).)

Given this, I’m really baffled by this repetition of the assertion that more competition in the market for health insurance is the answer. There’s no theoretical justification for it, and no empirical evidence for it. The fact is that people in the US consume more health care services every year. So every year we pay more.

One of the more common ideas often thrown around in health policy is the idea of allowing patients to purchase health insurance across state lines. The idea of course, is to allow patients access to potentially cheaper policies, and that by increasing competition, lower rates will ensue.

While this does not sound like the worst idea, there are several problems with this concept, the first, and most obvious, being regulatory. Insurance plans are regulated by each state, and each state has a mandatory minimum coverage. State regulators have legal authority to oversee all insurance matters within their state boundaries, but do not have the authority to oversee out of state plans. If a patient were to purchase insurance in a neighboring state, and then have a grievance or complaint against that company, the patients legal recourse might be very limited. Additionally, if they buy plans that do not meet the minimum coverage requirements of their own state, are there potential legal problems?

The second issue with this, is that it will create an adverse risk pooling. Out of state insurers will almost certainly offer plans to healthy, young individuals. This will leave in state insurers with a potentially sicker risk pool. What this will do is lower premiums potentially for one group of patients, but concurrently raise rates for a sicker group. Risk pooling, and spreading the risk through a group of patients is the backbone of health insurance, this could possibly interfere with this.

The final issue is fragmentation. In a system that is already badly fragmented, increased fragmentation reduces the leverage of insurers. In a BNET article in 2009, it was noted that the city of Milwaukee, with multiple insurers, and no dominant health insurer on the landscape, demonstrated that on average, providers would not accept less than 200% of Medicare as their reimbursement. Nearby Chicago however, with a dominant BC/BS insurance market demonstrates that on average, providers accepted 112% of Medicare as their reimbursement. The reason is simple. Leverage. Who has it? The insurers? Or, the providers?

Finally, perhaps the biggest issue with Interstate Health Insurance sales is that it fails to address rising costs. It will create a cost shifting onto sicker patients, and lower premiums for younger, healthier patients….but only temporarily. It will not address the continued, unsustainable rise in healthcare costs, and could create a regulatory nightmare.

Now, normally I wouldn’t celebrate anyone—let alone a friend—losing a job, but, you see, he sells medical insurance in Texas and Indiana. And he’s been told that over the next three years, his income will be reduced, and basically eliminated entirely ca. 2015.

Translation on a macro level: insurance companies—far from acting as if they are “uncertain”—are cutting the commissions they are paying to agents in preparation for greater competition as the phases of the PPACA come into effect.

We have already seen variations on this: insurance companies that will no longer write policies for only parents, because their children have other options. Insurance companies complaining about the “cost” of having to cover basic services—you know, the preventive care that would seem to be implied when you call your plan a “Health Maintenance Organization” and which is covered by State Medicaid plans such as NJ FamilyCares.

The English translation of “the market won’t support it” is “we can’t compete with our current structure.” It is a tale told by a capitalist since the beginning of double-entry accounting, with the steel industry being a recent example of American Rebirth.) Economists us the phrase “creative destruction” to explain it, even though there is very little creative and a lot of destruction (or, in significant cases, structural shifting) that goes on at the time.

“Bending the cost curve” means producing more consumer surplus. This is what competition does in economic models, primarily by cutting margins (“excess rent”) and thereby making firms allocate capital and labor more efficiently. When your margins are large—through monopoly power, including “monopolist competition”—consumer surplus is low. Since Steve Jobs is the sexiest human being in the world, Apple products sell for higher margins than other communication/computing devices do. This may always be so—or maybe the world will shift to Android phones, a and the Apple of five years from now will look like the Apple of 15 years ago, taking cash from Microsoft in order to survive.

Health insurance is an area hasn’t had true competition—search costs are too high for most people. (Indeed, the evil of employer-provided health insurance deductibility isn’t that it is a suboptimal allocation of resources so much as it is that that pre-tax money allows insurance companies to maintain higher margins without the consumer feeling the full cost of their loss. It is a system that perpetuates excess rent being paid, effectively as a transfer from the government to the insurer.) One of the first things health economists noted about Medicare Part D is that, while one had to “shop” to find an insurer, the effort required meant that very few people would then switch, even if the insurer later reaped excess rent. When switching costs (consumer) are higher than menu costs (supplier), excess rent is virtually an inevitability. (In this case, again, the American taxpayer is footing a large portion of the bill for a transfer to insurance companies. It is impossible to believe, given the bill’s enactment process, that this was not considered a feature.)

So there are multiple areas where consumer surplus is low in the health insurance industry. Which means that many people—including my friend—have been “earning” more than they are “producing”—some of the excess rent is distributed, after all. And, for the next few years, they will be seeing their incomes decline while people believe (as Jon Stewart said to Barack Obama last night) that PPACA will not take effect until 2014.

We saw this same sequence in the mid-1980s and early 1990s in the travel field—slowly at first, and then quickly as internet bookings and purchases determined solely by price became the rule. The survivors were the agencies with large corporate accounts and the ones that provided specialty (“niche”) services you couldn’t get from Travelocity and its competitors.

The travel agency market existed for one reason: in the old days, it cost an airline about 16 cents of every dollar to get a seat booked. An agent who could be paid 8-11% per ticket—with incentives for volume—was a bargain. It was, to use the economist’s favorite cliché, a win-win situation. And the benefits of tour and hotel bookings could truly be treated as marginal cost increases, with their own revenue stream generally more than enough to justify for even a small office.

But true competition—the decline in the incremental Search Costs presented to consumers by Travelocity and its competitors, followed quickly by direct booking availability directly with a specific airline—meant the end of that model, leading to industry consolidation, downsizings, and closings—just as the insurance agents are feeling the pressure now of the impending “exchanges.”

And, as then, my friend noted that there are still areas that will continue to be profitable for insurance agents in 2015. For insurance, policy service for the elderly. (Showers of gratitude from the insurance agents to the unfunded, deficit-exploding Medicare Part D shall continue.) Everything else will see the agents’s livelihood affected as the insurance companies try to protect their own share of the turf.

He has four years to prepare, and a roadmap for change that remains valuable. And for those interested in “bending the cost curve,” the first fruits of that effort are being realized. And people are realizing they will have to change their lifestyle and practices to deal with the new world.